In this paper we show that dual-class shares can be an answer to agency conflicts rather than a result of agency conflicts. When a firm issues voting shares to raise funds, an incumbent manager?s control rights are diluted. This increases the risk that an incumbent could lose control of the firm and therefore, could lose the associated benefits of control.
Thus, the incumbent may forgo positive NPV investments in an effort to maximize his expected wealth. Non-voting shares allow a firm to raise funds without diluting manager?s control rights; hence, it can alleviate the underinvestment problem. But non-voting shares facilitate entrenchment and therefore, reduces value-enhancing takeover activities. Also, non-voting shares dilute dividends per share. We obtain conditions under which the benefit of using non-voting shares, that is, higher firm value due to higher investment outweighs the entrenchment and dividend dilution costs. Others have shown that deviations from ?one share-one vote? can be optimal, but our study is the first to integrate the dualclass decision into the rich body of research on capital structure and underinvestment.
We find that corporate giving as a private benefit of control distorts investment and financing decisions, results supporting Jensen’s (1986) free cash flow theory. These investment distortions reduce shareholder wealth, especially in cash-...Read more
We develop a model in which an activist shareholder can discipline management through intervention and through the threat of intervention. A weaker disciplinary role played by the intervention mechanism leads to lower firm value and more frequent...Read more
Firms can issue stocks classified in many ways. They can be classified in respect to voting rights, dividend rights, redemption rights, conversion rights, and many others. In this study, we ask if it is desirable to give greater freedom to firms...Read more
This paper provides evidence that remote voting became the current technique for voting. Based on data for French companies, I found that gradually more and more shareholders, and not only institutional shareholders, vote in absentia. While a...Read more